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FTSE 100 forecast for 2020 and beyond

By Connor Freitas

With Boris Johnson securing a landslide victory and the UK’s departure from the EU all but certain, what is the FTSE 100 forecast for 2020 and beyond?

In this economy and political climate, delivering a FTSE 100 forecast is not for the faint-hearted. At the time of writing, the United Kingdom’s flagship index had risen by 13.5 per cent over the course of the year – from 6,734 on 2 January to 7,644.

According to FTSE 100 analysis, finishing 2019 at this level would result in its best annual performance that’s been seen for three years. Alas, life isn’t always this straightforward. Figures from FE Fundinfo recently suggested that the FTSE was actually the worst-performing index in the developed world as of 6 December with returns of 11 per cent – far behind the S&P 500 on 22 per cent.

So… some growth for investors, but nothing box office worthy. What gives? Well, shares in the UK have been trading at a discount for some time – recently because of never-ending concern over Brexit and fears in the City that Labour’s Jeremy Corbyn would win the general election. Data from Schroders, also released on 6 December, showed British shares were trading at a discount of more than 35 per cent when compared with global equivalents. That’s far beyond the average 17 per cent valuation discount seen over the past 30 years.

The FTSE 100 outlook has been more optimistic since Boris Johnson effectively delivered a Conservative landslide – reducing the chance of further Brexit deadlock in the Commons. Four days after the result became clear, the FTSE 100 was up by more than 2 per cent, increasing the valuation of shares by £42bn. Housebuilding companies and the Royal Bank of Scotland were among those who saw the biggest boost to their share prices, as well as firms that primarily make most of their revenue in the UK.

On 13 December – a day after the election – Sue Noffke, Schroders’ head of UK equities, had said: “This election outcome in many ways makes the UK stock market investable again for those who had shied away due to the previously high level of political uncertainty.”

FTSE 100 analysis from the London Stock Exchange powerfully illustrates how damaging this uncertainty has been. There were just 34 initial public offerings in the City this year – and as well as representing a 62 per drop compared with 2018, this is the lowest number of listings since the financial crisis way back in 2009.

Bearing all of this in mind, remember that the internationally focused FTSE 100 isn’t always the best barometer for what’s happening in the UK economy. For this, it is best to turn to the FTSE 250, which boasts mid-cap stocks. Here, the benefit of potential hurdles to Brexit being removed have been more keenly felt, with the index set to wrap up 2019 with its best performance in its six years.

FTSE 100 future predictions

Well, then – Boris is in power, consensus on Brexit appears more of a surety, so does this result in a more upbeat FTSE 100 outlook for 2020 and beyond? Unfortunately, there isn’t a clear-cut answer to this.

George Lagarias, the chief economist at Mazars, recently told Investment Week that Brexit will continue to “hamstring growth in the UK”, but when it comes to the FTSE 100, there are many other factors at play. As Sue Noffke notes, UK equities are a global beast – and this means that other international developments, such as the US-China trade war, could have just as much of an impact on the market’s performance next year.

In terms of concrete FTSE 100 predictions, AJ Bell believes that a record amount of dividends is going to make its way back to investors in 2020. A yield of 4.7 per cent is being forecast from the blue-chip index, resulting in payouts of £91.1bn. Sounding a note of caution, its analysts add that this would represent growth of just 1.8 per cent – levels which haven’t been seen since 2009 and 2010.

AJ Bell’s investment director, Russ Mould, also believes that the FTSE 100 has the potential to hit 8,000 by the end of 2020. With the index stagnating at levels from three years ago and the pound continuing to struggle against the dollar, he argues some may be underestimating the Footsie and that it could be undervalued. He said: “Were the UK to strike a trade deal with the EU, Washington and Beijing to settle their differences once and for all, and governments around the world abandon austerity and launch looser fiscal policies then the world could look very different.”

There are no guarantees that a UK-EU trade deal will be forthcoming. Although it seems like a legal departure from the trading bloc is all but guaranteed come January, Fidelity’s Ed Monk says the real challenge will come during the implementation period that’s scheduled to end in December 2020. As he wrote: “Boris Johnson has promised that this period will not be extended […]. The problem is that, as we stand today, no one with any expertise in trade negotiations believes that to be possible.” The PM would have to request an extension by July at the latest, and Monk believes that the threat of a no-deal departure could surface once again if Johnson attempts to appear hardline Brexiteers in his party.

Others, such as Barclays’ Matthew Joyce, believe that the so-called “Boris bounce” in the markets is done and dusted. His FTSE 100 forecast for 2020 is just 7,650 – meaning the index would stay about where it is now. He believes globally focused stocks in the energy and mining sectors are the best bet for next year, especially considering that oil prices have been steady throughout 2019.

Fidelity, making its FTSE 100 predictions, believes the opportunity may lie in how UK shares are somewhat cheap compared with their counterparts in the US and Asia. Its analysis suggests that some may be up to 24 per cent below fair value. When it comes to the stocks that could have an upbeat 2020, Fidelity says transport firms, pub chains and other UK-focused entities are the best place to start – not least because they’ll benefit from increased investment in infrastructure and any boost in consumer confidence. The investment company also believes smaller companies could enjoy a boost if the pound strengthens, as it would help them secure an upper hand over big exporters. “The UK is not out of the woods yet, but that’s good news for investors,” Tom Stevenson’s article adds.

FURTHER READING: FTSE 100 forecast for January

FURTHER READING: S&P 500 forecast for January 2020

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